CHAPTER 21

The Theory of Prices

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So long as economists are concerned with what is calledthe Theory of Value, they have been accustomed toteach that prices are governed by the conditions ofsupply and demand; and, in particular, changes inmarginal cost and the elasticity of short-period supplyhave played a prominent part. But when they pass involume ii, or more often in a separate treatise, to theTheory of Money and Prices, we hear no more of thesehomely but intelligible concepts and move into a worldwhere prices are governed by the quantity of money,by its income-velocity, by the velocity of circulationrelatively to the volume of transactions, by hoarding,by forced saving, by inflation and deflation et hoc genusomne\ and little or no attempt is made to relate thesevaguer phrases to our former notions of the elasticitiesof supply and demand. If we reflect on what we arebeing taught and try to rationalise it, in the simplerdiscussions it seems that the elasticity of supply musthave become zero and demand proportional to thequantity of money; whilst in the more sophisticatedwe are lost in a haze where nothing is clear and every-thing is possible. We have all of us become used tofinding ourselves sometimes on the one side of the moonand sometimes on the other, without knowing whatroute or journey connects them, related, apparently,after the fashion of our waking and our dreaming lives.

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